Saving for college and for retirement isn’t impossible

Believe it or not, you can handle your child's higher education costs and your 401(k) deferrals — you'll just have to start saving years in advance.

That was the finding reached by S. Katherine Roy, chief retirement strategist at JPMorgan Asset Management. She hosted a presentation on the topic at the recent Schwab IMPACT conference in San Diego.

Parents can create the bandwidth to fund college tuition and retirement if they begin saving as early as possible. Grandparents can help them get there with well-timed tax-free gifts, too.

"The good news is that if you do everything right, funding public school tuition is doable, and you can keep your retirement on track," said Roy.

Early sacrifices

In collaboration with Michael Conrath, a 529 program director at JPMorgan, Roy put together a case study to tackle the question of whether it's possible to save for retirement and college.

The cost of education would be highest for those with younger children. If a couple today has a newborn, it will cost $455,585 to send him or her to a four-year private institution, according to JPMorgan's projections. The cost of a public institution, on the other hand, will be $202,768.

The case study tracks a hypothetical married couple, the Lees. They are 28-years-old with a newborn, and they'd like to have a second child in two years.

The two have been working since age 22, earning total income of $60,000, and their salaries are growing at a rate that varies by age, based on JPMorgan's analysis of individual wage data from the Social Security Administration. The Lees have also been contributing to their 401(k)s since they've started their careers, earning an average annual rate of return of 6.5 percent.

Finally, the couple has been saving for college since the birth of their first child, earning a return of 6 percent per year.

The magic number

The couple can accumulate $6.5 million by age 65 if they begin saving 15 percent of their salaries in their 401(k)s at age 22, according to JPMorgan's research.

That deferral rate includes the Lees' 12 percent contribution, plus a 3 percent company match.

When the first child arrives, the couple, who will be 28 years old, can dial back their retirement plan savings rate to 12.2 percent and begin investing the difference — the equivalent of 2.8 percent of salary — into a 529 college savings plan.

After they have their second child at age 30, the couple continues saving to their 401(k), this time at a rate of 9.4 percent. The difference, which is equal to 5.6 percent of salary, continues to go toward the college savings plan.

Once the first child starts college and the Lees turn 46, they can ratchet up their retirement plan savings to 12.2 percent and continue to fund the college plan. After their youngest begins his or her higher education, the parents can revert to their original 15 percent deferral rate into their retirement plans.

They will maintain that level of savings until they retire at age 65.

Help from Grandma

Everyone wins if the grandparents decide to pitch in, according to JPMorgan's research.

You can make a lump sum contribution of up to $70,000 —$140,000 if you're married and filing jointly — to a 529 if you spread the gift out over five years.

Per the case study, if the grandparents make a $140,000 gift to the college savings account after the birth of the first child, the Lees can continue deferring 15 percent of their salaries into their retirement plans. By the time they reach retirement at age 65, they'll have $7.8 million in their 401(k)s.

Meanwhile, the grandparents have the added benefit of funding the kids' college expenses and moving the gifted assets out of their estate. "Gifting to others is something we've started to do more," said Roy. "Contribute to the 529 and take advantage of the estate planning benefit."

Reaching for private school

Roy admitted that even with a solid savings plan, fully funding four years at a private college for two kids is a stretch.

Past guidelines have called for parents to use up to a third of their earnings to pay for college, she said.

"It's difficult to cover a third of the cost from current income; [the family] will be eating cat food," Roy said.

A combination of saving early in a 529 plan, plus gifts from grandparents, can help families reach for private school.

A child can also take out a small student loan to help cover the costs. "What if they take out one semester's worth of loans?" said Roy. "Some studies suggest that it's not bad for kids to have some skin in the game and it makes them commit to the process."